WHY GENDER DIVERSITY IS GOOD FOR THE BOARDROOM
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WHY GENDER DIVERSITY IS GOOD FOR THE BOARDROOM
In numerous countries, women are recording stellar performance in various aspects. For instance, they are increasingly occupying senior positions in governments, rising to executive positions in leading corporations, and attaining more undergraduate and post-graduate degrees. However, despite these successes, the number of female directors on the boards of companies globally is still considerably low (Labelle et al., 2015; Nguyen et al., 2015; Joecks et al., 2013; Bugeja et al., 2012). This has intensified the discourse on gender diversity on company boardrooms. Boardroom diversity, particularly gender diversity has become an important topic of discussion for lawmakers, regulators, research institutions, as well as industry bodies throughout the world. This is particularly the case as economies become more globalized increasing the complexity of business challenges (García-Meca et al., 2015). In this light, it is clear that very few women are on the boards of directors of companies globally and more needs to be done to increase the number.
World over, there is a consensus that gender diversity on companies boards of directors should be improved. Subsequently, numerous governments and regulators have taken steps towards this direction. On the one hand, some governments have taken legislative actions and in some instances, imposed mandatory quotas (Labelle et al., 2015). On the other hand, some have employed moral suasion, leading to the introduction of voluntary measures. In the latter, the corporate governance codes are enhanced by requiring corporate bodies to make their policy towards gender diversity public. Likewise, they set targets for these companies.
Several countries, including Norway and France are increasing their efforts to improve gender diversity in boardrooms. However, a lot needs to be done for real results to be realized. For example, women make up only 20% of the directors in the S&P 500. The sectors that boast more gender diverse boardrooms include finance, consumer goods and services, and finally healthcare. Those that rank the lowest are technology and the basic materials sector. Nevertheless, board gender diversity varies from one country to another (Pletzer et al., 2015).
According to The CS Gender 3000: The Reward for Change, a 2014 Credit Suisse-authored report, the percentage of women board members was highest in Norway standing at 39.7% while Japan recorded the lowest at 1.6%. Those that had more than 25% women representation on boards were Finland, Denmark, and France. Countries such as Pakistan, Taiwan, South Korea and Japan boasted the lowest representation of less than 5%. In the European Union (EU), the percentage of women on boards of large and publicly listed companies stood at 21.2%. The United Kingdom (UK) recorded a slightly higher percentage of 25.9%. In line with this trend, Germany introduced quotas in 2015 requiring all major companies to reserve 30% of board positions to women. Despite these developments, the United States (U.S) continues to lag behind in creating gender-balance in corporate boardrooms (Joecks et al., 2013). This is occasioned by several factors.
Achieving gender parity is limited by the fact that recruitment of directors often informed by the directors’ individual networks (Hafsi & Turgut, 2013). Interestingly, these networks are comprised of white, older men. Further, in some instances, these men occupy more than one corporate boardroom seat. For instance, the 2015 Spencer Stuart Board Index established that on average, independent directors have about 2.1 corporate board affiliations. However, only a small percentage of these are female. In this regard, a 2013 study established that in America’s 2000 largest companies, women take up 28% of the directors that serve on one board. Interestingly, women comprise only 8% of those that serve on more than one board.
Slowed achievement of gender parity on corporate boards can also be attributed to lack of mentorship and political errors (Hafsi & Turgut, 2013). In this case, individuals who are first-time board members are 52% less likely to be given the opportunity to serve on other boards within two years after their first appointment. Likewise, women are likely to benefit from mentoring when appointed to boards which already have a female board member. However, the extent of mentoring, in this case, is limited and therefore inadequate to help these directors counter the status quo as put in place by the majority of the male and white directors.
Gender diversity is also hindered by the women candidates’ lack of executive experience as required for one to take the position of director. For example, according to Spencer Stuart, one of the main considerations in the recruitment of new director is a candidate’s background as either a Chief Operating Officer (COO) or Chief Executive Officer (CEO). The fact that only about 4.4% of CEOs out of all S&P 500 are women reduces the likelihood of women to be appointed to boards. Informed by the above statistics, in the year 2015, about 47% of all new male directors were either former or current chairs, COOs, presidents or CEOs. This was true for only 19% of the new female directors.
Achieving gender diversity in boardrooms should not be taken as merely a matter of course (Nguyen et al., 2015; Bugeja et al., 2012). Rather, it is important to note that it has a strong business case. Increasing women representation on boards of directors leads to mainstreaming of gender diversity in the entire organization. Therefore, increasing the number of women in an organization ensures that the entire workforce is more gender-balanced. A higher number of women in the boards also results in more women in the top executive positions. Hence, board diversity can help spur positive corporate behavior. This is through improvement of numerous aspects of corporate behavior and corporate governance.
Gender diversity plays a vital role in improving decision making on a board. It also enhances the firm's image through conveying to the public its commitment to inclusion and equal opportunity (Kakabadse et al., 2015). In this regard, the boards that have more female directors are likely to be more active in corporate philanthropy, availing more funds to charity. Also, female directors have been found to record better attendance compared to their male colleagues. Further, as women become increasingly represented in the boards, attendance problems of the male directors have been observed to reduce. Increasing the number of women board member increases the monitoring efforts carried out by the board.
Increasing the number of women on a firm's board results in improved corporate governance (Nguyen et al., 2015). This is especially with regard to the firm’s audit efforts. For instance, the boards that have a minimum of one female director are less likely to encounter negative feedback from external auditors. Further, the firms whose boards are gender-diverse are more likely to pay better audit fees. They are also more likely to work with specialist auditors compared to their counterparts. This suggests that boards with more female directors have higher chances of demanding for more monitoring via quality audit services. The companies with at least one female representative on their boards less likely to restate their annual or quarterly earnings compared to those in which the men dominate. This suggests that female representation in boards results in better company governance (Kakabadse et al., 2015). It also points to the fact that inclusion of women in boards promotes heterogeneity reducing chances of ‘group-think’ and forces them to ask tougher queries.
Increasing women representation on company board may result in losses in the short-term. However, in the long-term, the gains to the company and society at large far outweigh the costs. For example, the institution of a gender representation quota in countries is likely to result in the decline of operating profits compared to the assets. This is due to the resultant increase in labor costs owing to higher employment and reduced layoffs. This is in comparison to companies located in countries without a gender quota. For the companies, the quota is likely to have a cost in the short-term. However, fewer layoffs point towards a longer-term, stakeholder-oriented angle that is likely to result in long-term, country-wide benefits. More women in boards also translate into the building of companies that are more sustainable (Kakabadse et al., 2015). Research shows that companies that have a minimum of three women on their board of directors are more likely to have an enhanced environmental, social and governance (ESG) performance compared to those with no female representation. However, many companies lack this level of representation.
Board diversity plays a significant role in enhancing a company’s financial performance. Thus, firms with more women representatives on their boards are likely to outperform those without on such parameters as return on sales, equity and invested capital. Gender diversity in corporate boards also plays a crucial role in the creation of value following corporate transactions. Previous studies have established that the presence of more women in executive positions led to increased profitability and that those companies posted slightly better performance compared to their counterparts. Levi et al. (2014) established that presence of women on a company board positively impacts a company’s value by reducing both the volume and cost of acquisition. Likewise, Bugeja et al. (2012) found that despite the fact that gender diversity on boardrooms did not directly impact the size of the bid premium as well as the market reaction to the acquisition announcement, it was associated with the acquirers’ positive performance in the long-term. This implies that gender diverse boards are better placed to choose firms that result in increased future profitability or ones that make post-merger integration easy. These boards might also be more efficient in taking a firm through tough economic times. This is because gender diversity leads to more balance and less volatility through different economic cycles.
Gender diversity has been associated with improved effectiveness in corporate boards. This is by facilitating better decision making and the formulation of better policies (Rhode & Packel, 2014). Women not only bring different voices and perspectives to the table, but they also enrich the debate leading to better decisions. They also improve the independence of the board, take their roles more seriously and are not afraid of asking the hard questions. Therefore, they are likely to improve the decisions made. Gender diversity helps reduce the insolvency risk, and this takes place irrespective of the company size, ownership, sector and age.
The inclusion of women on boards allows for better use of the available talent pool. Subsequently, this allows the companies to compete more effectively. Recently, more and more women are achieving progress at work and in education. They also constitute a significant portion of the existing talent pool globally. For instance, women make up to 60% of the university graduates. They also constitute half the workforce in countries such as the UK. In such countries as Singapore, the participation of women in the national workforce rose to 58% in 2013 from 51% in 2003. Since half of the talent pool globally comprises of women, it only makes sense for them to be included in the social and economic development. This is in a bid to make sure that the top brains are involved in the process of resolving complex corporate challenges. As different parts of the world experience shortage in human resources and the effects of aging population, underutilization of the female talent cannot be entertained. This is because the contribution of women to the bottom-line of companies cannot be overstated (Pletzer et al., 2015). Companies that boast gender-diverse boasts are more likely to promote diversity in the workplace culture. This enables them to attract more talent so as to compete more effectively as the marketplace becomes more diverse and globalized.
Several steps can be taken to increase gender representation in boards. Firstly, there is a need to foster an inclusive culture (Labelle et al., 2015). Establishing this environment is critical to ensuring that a board increases value. An effective culture is pegged on a balanced composition of the board coupled with its commitment t excellence. This way, the board can promote diversity, debate and thoughtful dissent and challenge. The board is also tasked with the responsibility of setting the tone for an organization's culture. Therefore, the value and importance of diversity should be embedded and integrated into an organization's culture as well as its board. Achieving diversity is also pegged on the creation of a merit-based culture in which diversity and inclusion are requisites (Labelle et al., 2015). It also requires optimizing and accessing a diverse talent pool so as to enhance not only the individual but also the collective capability.
There is also a need to recognize and resolve unconscious bias. In the corporate world, bias can take different forms. These include stereotypes and the human tendency to move towards familiar faces. Consequently, informed by bias, it is highly likely for individuals to make final and unsubstantiated judgments about other people. In the composition of boards, bias leads the directors to surround themselves with the people they are familiar with (Labelle et al., 2015). Unconscious bias is as a result of unconscious knowledge and thinking processes and may result in non-optimal decision making. Lack of diversity on boards indicates the presence of unconscious bias in the process of appointing board members. This implies that the board composition is not based on company needs, and thus is not likely to be effective.
Periodic review of board composition is necessary for the quest to promote diversity. This is because board composition is an indicator of culture and structure. Likewise, a company's board composition determines its performance. Thus it is important that the right mix of individuals is included on the board. This diversity plays a crucial role in making the board effective by ensuring that there's a range of insights and perspectives, hence leading to better decision-making (Labelle et al., 2015). Diversity should be about the entire board and its need as opposed to individual appointments. Moreover, the right mix of both old and young individuals should be considered. A diverse board ensures that both experience and wisdom are merged with fresh ideas to meet the needs of the respective organization.
Boards ought to spearhead the creation of an appropriate company culture and prioritization of diversity. This can be done by developing diversity objectives while at the same time ensuring that the board is comprised of individuals with both the experience and skills needed to meet both immediate and future needs (Kakabadse et al., 2015. The board should also hold the organization's management to account for their role of initiating and leading diversity initiatives in the organization. Promoting diversity on boards should not be done for purposes of compliance but rather for ensuring that the board is effective. Further, for the diversity of perspective and thought to thrive, a critical mass is requisite.
Despite the advantages of board gender diversity, there are a number of opposing voices. One argument is that enhanced diversity ought not to be confused as a panacea. This is because the relationship between corporate performance and gender diversity is complex. Therefore, the inclusion of women on boards does not automatically result in improved performance. Pletzer et al. (2015) established that the correlation between performance and the number of women on corporate boards was insignificant. On the other hand, Sila et al. (2016) found no causal relationship between lower risk of equity and female representation in boardrooms. Further, Rhode & Packel (2014) found no relationship between financial performance and board diversity. Moreover, García-Meca et al. (2015) concluded that board diversity did not have much influence on performance.
Overall, diversity plays a crucial role in enhancing corporate performance. This is due to the presence of committed and qualified directors from different backgrounds and boasting diverse knowledge and experiences. However, increasing the influence and number of women in corporate boards should ensure that only qualified candidates and those who bring insight and experience to the boards are recruited.
Bibliography
Bugeja, M., Ghannam, S., Matolcsy, Z., & Spiropoulos, H. (2012). Does Board Gender-Diversity Matter in M&A Activities?
In this article, the authors focus on the economic implications of board gender diversity in Mergers and acquisitions. They conclude that board gender diversity does not have an effect on the bid premium as well as the strength of the reactions to the announcement of the merger. Nevertheless, they argue that it influences the acquirer's long-term performance.
García-Meca, E., García-Sánchez, I. M., & Martínez-Ferrero, J. (2015). Board diversity and its effects on bank performance: An international analysis. Journal of Banking & Finance, 53, 202-214.
The authors of this article explore the effect that board diversity has on the performance of banks. They conclude that in the absence of weak regulatory environment and low investor protection, the influence of board diversity on performance of banks is not much.
Hafsi, T., & Turgut, G. (2013). Boardroom diversity and its effect on social performance: Conceptualization and empirical evidence. Journal of Business Ethics, 112(3), 463-479.
Hafsi and Turgut seek to demystify boardroom diversity in the context of strategic management. They also seek to establish if a relationship exists between corporate social performance and boardroom diversity. They also argue that age and gender significantly affect corporate social performance.
Joecks, J., Pull, K., & Vetter, K. (2013). Gender diversity in the boardroom and firm performance: What exactly constitutes a “critical mass?”. Journal of business ethics, 118(1), 61-72.
This article explores the link between firm performance and gender diversity. They argue that gender diversity initially negatively affect the performance of a firm. However, on attaining about 30% female representation, higher performance is attained.
Kakabadse, N. K., Figueira, C., Nicolopoulou, K., Hong Yang, J., Kakabadse, A. P., & Özbilgin, M. F. (2015). Gender diversity and board performance: women's experiences and perspectives. Human Resource Management, 54(2), 265-281.
The authors carried out a quantitative study of 30 companies featuring women directors in the U.S, U.K and Ghana to investigate the relationship between corporate governance and gender diversity. They conclude that presence of a few women on corporate boards has an insignificant effect on the performance of the board.
Labelle, R., Francoeur, C., & Lakhal, F. (2015). To regulate or not to regulate? Early evidence on the means used around the world to promote gender diversity in the boardroom. Gender, Work & Organization, 22(4), 339-363.
This paper compares how effective it is to use a regulatory or legislative measure to enhance female representation as opposed to leaving the firms to address their non-legally binding targets. The results showed that the relation between performance and gender diversity is positive the nations where voluntary is used and negative in those employing regulatory approach.
Levi, M., Li, K., & Zhang, F. (2014). Director gender and mergers and acquisitions. Journal of Corporate Finance, 28, 185-200.
In this article, the authors seek to find out whether the gender of directors influences empire building and whether it affects the bid premium that is paid for target firms. The paper supports the perception that female directors increase the stakeholder value via their influence on decisions pertaining to acquisitions.
Nguyen, T., Locke, S., & Reddy, K. (2015). Does boardroom gender diversity matter? Evidence from a transitional economy. International Review of Economics & Finance, 37, 184-202.
This article investigates the relationship between a firm’s financial performance and its board’s gender diversity. This is particularly in the context of an economy in transition and thus characterized by a corporate governance system that is underdeveloped. The authors argue that there is a trade-off between the benefits and costs of diversifying gender on a corporate board.
Pletzer, J. L., Nikolova, R., Kedzior, K. K., & Voelpel, S. C. (2015). Does gender matter? Female representation on corporate boards and firm financial performance-A meta-analysis. PloS one, 10(6), e0130005.
In this meta-analytical investigation, the relationship between the representation of women in corporate boards the financial performance of firms is examined. The results suggest that merely representing women on boards does not improve the performance of corporate entities when other factors are not put into consideration.
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In this paper, the authors examine the ethnic, racial and gender diversity in boards of corporate entities. They also explore whether these factors influence the financial performance of these firms. They conclude that the relationship between financial performance and gender diversity as established in unconvincing.
Sila, V., Gonzalez, A., & Hagendorff, J. (2016). Women on board: Does boardroom gender diversity affect firm risk?. Journal of Corporate Finance, 36, 26-53.
This paper investigates the relationship between firm risk and gender diversity in the boardroom. The authors argue that there is no evidence that equity risk is influenced by the representation of women in corporate boardrooms. Their findings also show that opinions of a negative relationship in this regard are unsubstantiated.